## 1. Characteristics of Main Sovereign Debt Restructurings with Foreign Banks and Bondholders

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### I. Introduction — scope and questions
- Focus: emerging market (EMs) sovereign debt restructuring episodes from the late 1990s (following the Brady exchange) through 2010.
- Sample: 24 sovereign debt restructuring cases described in the paper; broader datasets referenced (e.g., 186 sovereign debt-related episodes in EMs since the 1950s).
- Key questions addressed:
  - How do the structure and composition of the investor base contribute to the debt restructuring process and its outcome?
  - What elements of restructuring slow down or expedite the process?
  - How do financial stability considerations and spillovers influence restructuring design?
  - Does the nature of a restructuring affect domestic financial intermediation and economic activity post restructuring?

### II. Definitions and basic concepts
- Sovereign debt restructuring: exchange of outstanding sovereign debt instruments, such as loans or bonds, for new debt instruments or cash through a formal process.
- Two main elements:
  - Debt rescheduling: lengthening of maturities of the old debt, possibly involving lower interest rates.
  - Debt reduction: reduction in the face (nominal) value of the old instruments.
- Historical counts and definitions:
  - Total sovereign debt-related episodes in EMs since the 1950s: 186.
  - Episodes involving a face-value reduction of debt owed to the private sector: 57.
  - Remaining episodes were purely rescheduling.
  - Distressed debt exchanges (rating-agency definition): restructurings at terms less favorable than original bond or loan terms.
  - Default: failure of a government to make a principal or interest payment on time (beyond the grace period). Defaults can be partial or complete.
  - Credit event (ISDA criteria): restructuring is a credit event only if (i) it occurs as a result of deterioration in the creditworthiness or financial condition of the sovereign; and (ii) it is “binding on all holders” (mandatory form application to all bondholders of a series).

### III. Determinants of restructurings and defaults
- Common triggers:
  - (i) a worsening of the terms of trade;
  - (ii) a recession in countries that act as sources of capital;
  - (iii) an increase in international borrowing costs (e.g., due to tighter monetary policy in creditor countries);
  - (iv) consistently poor macroeconomic policies, leading to built up of vulnerabilities; and
  - (v) a crisis in a systemic country that causes contagion across goods and financial markets.
- Additional factors: macroeconomic volatility; banking crises and related contingent liabilities; political and institutional factors.
- Market perception effects:
  - Secondary market bond and sovereign CDS spreads and changes in sovereign ratings are common risk indicators.
  - Debt crises can be self-fulfilling; “debt run” or effective exclusion from capital markets can force payment halts, especially with large rollover risks.
- Select empirical risk thresholds (Box 1):
  - Debt/GDP threshold for “safety from default” may be as low as 20 percent for some countries.
  - Risk thresholds above 60 percent of debt/GDP for EM countries that have never defaulted.
  - Finger and Mecagni (2007): most recent debt crises occurred at debt/GDP > 39 percent.
  - Manasse and Roubini (2008) thresholds in the EM context:
    - External debt to GDP:            > 50 percent
    - Short-term debt to reserves:    > 130 percent
    - Public debt to revenues:          > 215 percent
    - Inflation                                   > 10.5 percent
    - Growth                                    < - 5.5 percent
    - Political uncertainty               upcoming election
- Debt portfolio structure considerations:
  - Currency composition: foreign-currency debt increases vulnerability to exchange rate shocks.
  - Floating rate debt: high share increases exposure to interest rate shocks.
  - Maturity structure: longer average maturity implies less rollover risk.
  - Creditor composition: domestically held debt restructurings can be more politically challenging and may lead to contingent liabilities and bank bailouts; share of official vs. private creditors matters.

### IV. Stylized facts about recent debt restructuring episodes (1998–2010)
- Sample focus: sovereign debt restructurings in EMs between 1998 and 2010; Table 1 catalogs bank and bond debt exchanges involving foreign creditors since the Brady deal.
- Geographic distribution (of the 18 detailed episodes listed in Table 1):
  - Half occurred in Latin America and the Caribbean.
  - Four in Europe.
  - Three in the Middle East.
  - Two in Africa.
- Timing and duration:
  - Of 18 episodes in Table 1, seven restructurings took one year or less to complete.
  - Only three took more than two years to complete.
- Range of debt relief and creditor losses:
  - NPV reduction ranged from 5 percent (Dominican Republic, 2005) to nearly 90 percent (Iraq, 2006).
  - Cuts in face value ranged from 0–82 percent of the eligible instruments.
  - Reported estimates measure investor losses averaged across instruments exchanged using methodology comparing PV of new instruments with PV of old outstanding debt discounted at imputed exit yields.
- Preemptive vs. post-default:
  - Post–default restructuring cases on average achieved higher NPV haircut than preemptive restructuring cases.
- Instruments and market performance after exchange:
  - Instruments restructured ranged from one bond to several bonds and loans.
  - Representative benchmark bond prices in the two years following restructuring:
    - Average bond prices increase moderately after restructuring.
    - Volatility tends to be low in the first six months after the event.
    - Bond prices performed better after preemptive restructurings compared to post-default restructurings over a two-year horizon.
- Global counts and patterns (Box 2 select figures):
  - More than 600 individual sovereign debt restructuring cases in 95 countries during the past 60 years.
  - Of these, 186 were debt restructurings with private creditors (foreign banks and bondholders).
  - More than 450 involved restructurings with the Paris Club (government-to-government debt).
  - Of the 186 debt exchanges with foreign private creditors:
    - 18 were sovereign bond restructurings, while 168 affected bank loans.
    - 57 involved a cut in face value (debt reduction), while 129 implied only a lengthening of maturities (debt rescheduling).
    - 109 cases occurred post-default, while 77 were preemptive.
    - Only 26 involved cash buybacks (most buybacks involved discounts of 80 percent or more).

### V. Selected case and Table 1 highlights (1998–2010; selected exact figures)
- Pakistan (Bank Loans):
  - Post-Default; Default Date Aug-98; Announcement of Restructuring Aug-98; Start of Negotiations Mar-99; Final Exchange Offer May-99; Date of Exchange Jul-99; Total Duration (Months) 11; Debt Exchanged in m US $ 777; Cut in Face Value 0.0%; Haircut Estimate (Cruces/Trebesch) 11.6%; Discount Rate (Cruces/Trebesch) 0.132.
- Argentina (Ext. Bonds):
  - Post-Default; Default Date Jan-02; Announcement of Restruct. Oct-01; Start of Negotiations Mar-03; Final Exchange Offer Jan-05; Date of Exchange Apr-05; Total Duration (Months) 42; Debt Exchanged in m US $ 60,572; Cut in Face Value 29.4%; Haircut Estimate (Cruces/Trebesch) 76.8%; Discount Rate (Cruces/Trebesch) 0.104; Outstanding Instruments Exchanged 66 US$ and AR$ denominated Bonds; New Instruments 5 US$ and AR$ denominated Bonds.
- Iraq (Bank/Comm. Loans):
  - Post-Default since 2003; Announcement in 2004; Start of Negotiations Jul-05; Final Exchange Offer Jul-05; Date of Exchange Jan-06; Total Duration (Months) 20 (since announcement); Debt Exchanged in m US $ 17,710; Cut in Face Value 81.5%; Haircut Estimate (Cruces/Trebesch) 89.4%; Discount Rate (Cruces/Trebesch) 0.123; Outstanding Instruments Exchanged Loans, Supplier Credit, Arrears; New Instruments Mostly Cash, 1 US$ Bond, 1 Loan.
- Ecuador (Ext. Bonds) (Post-Default):
  - Announcement Aug-99; Start of Negotiations Jul-98; Final Exchange Offer Sep-99; Date of Exchange Jul-00; Total Duration (Months) 25; Debt Exchanged in m US $ 6,700; Cut in Face Value 33.9%; Haircut Estimate (Cruces/Trebesch) 38.3%; Discount Rate (Cruces/Trebesch) 0.173; Outstanding Instruments Exchanged 4 Brady Bonds, 2 Eurobonds; New Instruments 2 Eurobonds.
- Russia (Bank Loans):
  - Post-Default; Default Date Dec-98; Announcement Sep-98; Start of Negotiations May-99; Final Exchange Offer Feb-00; Date of Exchange Aug-00; Total Duration (Months) 23; Debt Exchanged in m US $ 31,943; Cut in Face Value 36.4%; Haircut Estimate (Cruces/Trebesch) 50.8%; Discount Rate (Cruces/Trebesch) 0.125; Outstanding Instruments Exchanged PRINs, IANs, debt arrears; New Instruments 1 Eurobond.

### VI. Observations on negotiation length, participation, litigation and financial stability linkages
- Duration:
  - Many restructurings completed in relatively short periods (seven of 18 within one year), but a minority required extended negotiations (three > two years).
- Participation and cuts:
  - NPV relief and face-value cuts vary widely across cases (NPV reductions 5 percent to nearly 90 percent; face-value cuts 0–82 percent).
- Litigation and holdout risks:
  - Litigation, holdouts, financial sector linkages, and political environment identified as common obstacles that can slow down restructurings.
- Financial stability considerations:
  - Restructuring design may be influenced by potential contingent liabilities, bank exposures, and need to maintain domestic financial intermediation; domestically held debt restructurings can present additional fiscal and banking system challenges.

### XIV. Participation, domestic vs external restructuring, and creditor characteristics
- Main finding on participation and offer reasonableness:
  - High participation rates and speedy completion of most recent debt restructuring episodes likely suggest that the underlying offers were seen by participating creditors as reasonable, reflecting governments’ capacity to pay and offering adequate burden sharing.
- Domestic versus external debt restructurings — notable differences:
  - Domestic debt adjudicated domestically; litigation mostly in domestic courts.
  - Investors in domestic instruments are normally mostly residents (domestic banks, insurance companies, and pension funds); restructuring domestic debt directly affects balance sheets of domestic financial institutions and can affect overall financial stability.
  - Exchange rate considerations and currency mismatches play a lesser role in domestic debt than in external debt restructurings.
  - Financial sector stability considerations often play an important role in domestic sovereign debt restructurings.
- Speed of implementation examples:
  - Argentina’s domestic debt restructured in November 2001; external bond exchange took four more years.
  - Russia’s domestic GKO bonds were restructured within six months (between August 1998 and March 1999); external bank loans restructured by 2000.
  - Ukraine’s domestic debt exchange implemented in less than two months.
  - Jamaica’s domestic debt restructuring took about two months.
- Differential treatment examples:
  - Belize (2007): government restructured only the external bonds.
  - Ecuador (1998–2000): restructured short- and long-term bonds held by nonresidents, but not medium- and long-term domestic debt.
  - Ecuador (2008–2009): default and debt buyback affected two outstanding international bonds, but no domestic debt.
  - Jamaica (2010): externally issued Eurobonds were excluded from the restructuring.
- Creditor residence and instrument type caveat:
  - Nonresidents sometimes hold substantial domestic debt (e.g., Russia, 1998; Ukraine, 1998).
  - Residents sometimes hold considerable shares of externally issued bonds (e.g., Pakistan, 1999; Uruguay, 2003).
  - Domestic debt can also be denominated in foreign currency.

### Bank versus bond restructurings, litigation, and CACs
- Creditor dispersion:
  - Bond creditors typically more dispersed than bank creditors; e.g., Argentina (2005) and Ukraine (2000) involved thousands of individual creditors.
- Holdouts and litigation:
  - Widely seen as principal obstacle to bond restructurings; free-riding and coordination failures more problematic for bond financing than bank financing in EMs.
  - Litigation occurrences: 112 individual litigation occurrences in the past thirty years (Enderlein, Schumacher and Trebesch, 2012).
  - More than half of all cases initiated after 2000.
  - Number of successful litigations by creditors remains very small; holdout strategies and litigation are costly and require specialized knowledge.
- Empirical findings:
  - Bond restructurings on average quicker to implement than bank debt exchanges.
  - Participation rates have often exceeded 90 percent, even with dispersed bondholders.
  - Trebesch (2008): no robust evidence that creditor characteristics play a dominant role in the duration of debt restructurings.
  - Bi, Chamon, and Zettelmeyer (2011): full participation is the norm as long as neither the haircut nor the probability of successful holding out is too high.
- Collective Action Clauses (CACs) and exit consents:
  - CACs inclusion has become the norm under English law and widened in recent years.
  - Mexico first included CACs in New York market sovereign bond issue in February 2003; other early adopters in 2003 included Uruguay, Brazil (April); Korea, South Africa (May); Belize (June); Italy (July); Turkey (September).
  - Experience with CACs mixed: successful in Ukraine (2000), Moldova (2002), Uruguay (2003); embedded in Dominica (2004) and Argentina (2005) but did not prevent holdout problems.
  - Exit consents first used in Ecuador’s 2000 exchange under New York law; use has generally withstood legal challenges in U.S. courts.
  - Use of aggregation, acceleration, cross-default, and cross-acceleration clauses in recent restructuring episodes has been limited.
  - Amendments of nonpayment terms occurred in Dominica (2004), the Dominican Republic (2005), Argentina (2005), and Belize (2007).

### XXX. CDSs, credit events, macro and financial stability implications
- CDSs and credit events:
  - ISDA announcement of a credit event typically depends on characteristics of the debt exchange (for example, whether terms are binding for all creditors), not on whether the restructuring is pre- or post-default.
  - View exists that CDS holders who also own the underlying bond may have an incentive not to participate in a pre-default debt exchange and to prefer forcing a default that constitutes a credit event.
  - Sovereign CDS market relatively small compared with underlying outstanding debt; such incentive-driven risk has been fairly limited to date.
  - Empirical example: Ecuador — Payments on Ecuador's CDS were triggered on December 15, 2008; ISDA launched its first sovereign CDS auction; recovery rate in the auction was set at 31.75 percent.
- Macroeconomic implications (select medians and outcomes):
  - Total public debt to GDP: median fell from over 50 percent to about 35 percent around restructuring.
  - Total external debt to GDP: median fell from close to 80 percent to below 50 percent.
  - External short-term debt to reserves: median fell from more than 110 percent to just over 55 percent in a single year.
  - Median real growth: around 1.5 percent three years before final agreements, consistently above 4 percent during the three years following the exchange.
  - Median CPI inflation: around 20 percent three years before restructuring, decreasing to just 7.5 percent three years after restructuring.
  - Private sector access to external credit: often drops by up to 40 percent in the year after restructuring.
  - FDI flows: may drop by up to 2 percent of GDP per year.
  - Credit ratings: decline by more than four notches in the three years prior to a sovereign default event; after restructurings ratings gained only an average of 1.7 notches in the three subsequent years.
  - After one year most sovereign bonds retained a C-rating.
  - Market access: most defaulters regain access to new credit within one or two years after a crisis; Argentina had not been able to access global markets since its 2001 default (at time of writing); Ecuador took five years (in 2005) after restructuring to regain access.
  - Post-restructuring spreads: greater haircuts associated with much larger post-restructuring bond spreads; effect decreases over time but remains significant in years six and seven; haircut size highly correlated with duration of capital market exclusion.
- Financial stability channels and historical examples:
  - Direct and indirect bank channels: asset-side losses from restructured assets losing value; liability-side pressures from deposit withdrawals and interruption of interbank credit lines; interest rate hikes increasing banks' funding costs and impairing income.
  - Russia: default contributed to effective collapse of the domestic banking system; large banks exposed to domestic treasury bills and currency mismatches; some banks insolvent and defaulted on external obligations.
  - Ecuador: sovereign default followed a systemic banking crisis (liquidation of five financial institutions); restructuring further dented banks’ capital.
  - Jamaica (2010): concerns about financial sector stability prompted government to adopt a preventive Financial Sector Support Fund (FSSF).
- Policy measures and contingency mechanisms — Jamaica FSSF (illustrative):
  - Size and purpose: US$950 million in multilateral funds established as a contingent measure to address possible adverse impacts of the debt exchange on the financial sector.
  - Access restricted to financial institutions that participated at a rate of at least 90 percent in the debt exchange; FSSF acted as an incentive to participate.
  - Primary use: provide liquidity support for external funding calls or deposit/asset pressures attributable to the debt exchange.
  - Interest rate set to avoid fiscal costs; any borrowing repaid within 6 months or else a punitive rate would apply.
  - Liquidity support above a threshold (percent of capital) would trigger increased regulatory intervention; emergency liquidity triggers would lead to supervisory actions and possible intervention if maximum levels were breached.
  - Outcome: No requests for assistance from the FSSF were filed during and after the restructuring.
- General observation:
  - Debt restructurings can have significant spillovers into the financial sector; contingency backstops may minimize impact but governments may ultimately bear recapitalization costs.

### XLVI. Cross-default, cross-acceleration, aggregation clauses and voting thresholds
- Cross-default definition and effects:
  - A cross-default takes place if a default event on one debt contract can trigger a default on another agreement.
  - Missed payment (including a coupon payment) can trigger a default vis-à-vis the remainder of government’s (bank and bond) obligations.
  - Cross-default clauses can strengthen inter-creditor equity and deter selective default.
  - Many bonds provide for a minimum amount (e.g., 25 percent) to trigger cross-default provisions.
- Cross-acceleration and exit consents:
  - Cross-acceleration: acceleration on one debt contract may accelerate other debt contracts.
  - Exit consents are often used to remove cross-default/cross-acceleration clauses from old bond contracts to protect new bondholders from legal remedies by nonparticipating holdouts.
- Aggregation clauses:
  - Allow aggregation of creditor claims across bonds and other debt instruments for voting purposes, enabling supermajorities to amend terms across multiple series.
  - Use in practice remains limited.
  - Uruguay introduced them during the 2003 exchange and was followed by Argentina (2005) and several smaller issuers, including Belize and the Dominican Republic.
  - Aggregated CACs in Argentina and Uruguay contain a dual voting threshold: modification requires approval by 85 percent of bonds of all affected series (aggregate) as well as by 66 percent of outstanding bonds of each affected series (issue-by-issue).
  - Aggregation clauses have not been called yet in any sovereign debt workout in recent years.

*Prepared by Udaibir Das, Michael Papaioannou, David Grigorian, and Samar Maziad (MCMDM) — content drawn from “1. Characteristics of Main Sovereign Debt Restructurings with Foreign Banks and Bondholders” (1998–2010) as provided.*

### 1. Characteristics of Main Sovereign Debt Restructurings with Foreign Banks and

### 1. Characteristics of Main Sovereign Debt Restructurings with Foreign Banks and Bondholders

### I. Introduction — scope and questions
- Focus: emerging market (EMs) sovereign debt restructuring episodes from the late 1990s (following the Brady exchange) through 2010.
- Sample: 24 sovereign debt restructuring cases described in the paper; broader datasets referenced (e.g., 186 sovereign debt-related episodes in EMs since the 1950s).
- Key questions addressed:
  - How do the structure and composition of the investor base contribute to the debt restructuring process and its outcome?
  - What elements of restructuring slow down or expedite the process?
  - How do financial stability considerations and spillovers influence restructuring design?
  - Does the nature of a restructuring affect domestic financial intermediation and economic activity post restructuring?

### II. Definitions and basic concepts
- Sovereign debt restructuring: exchange of outstanding sovereign debt instruments, such as loans or bonds, for new debt instruments or cash through a formal process.
- Two main elements:
  - Debt rescheduling: lengthening of maturities of the old debt, possibly involving lower interest rates.
  - Debt reduction: reduction in the face (nominal) value of the old instruments.
- Since the 1950s:
  - Total sovereign debt-related episodes in EMs: 186.
  - Episodes involving a face-value reduction of debt owed to the private sector: 57.
  - Remaining episodes were purely rescheduling.
- Distressed debt exchanges (rating-agency definition): restructurings at terms less favorable than original bond or loan terms.
- Default: failure of a government to make a principal or interest payment on time (beyond the grace period). Defaults can be partial or complete.
- Credit event (ISDA criteria): a restructuring is a credit event only if:
  - (i) it occurs as a result of deterioration in the creditworthiness or financial condition of the sovereign; and
  - (ii) it is “binding on all holders” (mandatory form application to all bondholders of a series).

### III. Determinants of restructurings and defaults
- Common triggers for defaults and restructurings:
  - (i) a worsening of the terms of trade;
  - (ii) a recession in countries that act as sources of capital;
  - (iii) an increase in international borrowing costs (e.g., due to tighter monetary policy in creditor countries);
  - (iv) consistently poor macroeconomic policies, leading to built up of vulnerabilities; and
  - (v) a crisis in a systemic country that causes contagion across goods and financial markets.
- Additional factors: macroeconomic volatility; banking crises and related contingent liabilities; political and institutional factors.
- Market perception effects:
  - Secondary market bond and sovereign CDS spreads and changes in sovereign ratings are common risk indicators.
  - Debt crises can be self-fulfilling; “debt run” or effective exclusion from capital markets can force payment halts, especially with large rollover risks.

- Box 1 — Risk Indicators for Default (select empirical thresholds reported):
  - Debt/GDP threshold for “safety from default” may be as low as 20 percent for some countries.
  - Risk thresholds above 60 percent of debt/GDP for EM countries that have never defaulted.
  - Finger and Mecagni (2007): most recent debt crises occurred at debt/GDP > 39 percent.
  - Manasse and Roubini (2008) thresholds in the EM context:
    - External debt to GDP:            > 50 percent
    - Short-term debt to reserves:    > 130 percent
    - Public debt to revenues:          > 215 percent
    - Inflation                                   > 10.5 percent
    - Growth                                    < - 5.5 percent
    - Political uncertainty               upcoming election

- Debt portfolio structure considerations affecting likelihood/timing of default:
  - Currency composition: foreign-currency debt increases vulnerability to exchange rate shocks.
  - Floating rate debt: high share increases exposure to interest rate shocks.
  - Maturity structure: longer average maturity implies less rollover risk.
  - Creditor composition: domestically held debt restructurings can be more politically challenging and may lead to contingent liabilities and bank bailouts; share of official vs. private creditors matters.

### IV. Stylized facts about recent debt restructuring episodes (1998–2010)
- Sample focus: sovereign debt restructurings in EMs between 1998 and 2010; Table 1 catalogs bank and bond debt exchanges involving foreign creditors since the Brady deal.
- Geographic distribution (of the 18 detailed episodes listed in Table 1):
  - Half occurred in Latin America and the Caribbean.
  - Four in Europe.
  - Three in the Middle East.
  - Two in Africa.

- Timing and duration:
  - Of 18 episodes in Table 1, seven restructurings took one year or less to complete.
  - Only three took more than two years to complete.

- Range of debt relief and creditor losses:
  - NPV reduction ranged from 5 percent (Dominican Republic, 2005) to nearly 90 percent (Iraq, 2006).
  - Cuts in face value ranged from 0–82 percent of the eligible instruments.
  - Reported estimates measure investor losses averaged across instruments exchanged using methodology comparing PV of new instruments with PV of old outstanding debt discounted at imputed exit yields.

- Preemptive vs. post-default and haircuts:
  - Post–default restructuring cases on average achieved higher NPV haircut than preemptive restructuring cases (consistent with Finger and Mecagni (2007)).

- Complexity and instruments:
  - Instruments restructured ranged from one bond to several bonds and loans.
  - Performance after exchange: representative benchmark bond prices in the two years following restructuring:
    - Average bond prices increase moderately after restructuring.
    - Volatility tends to be low in the first six months after the event.
    - Bond prices performed better after preemptive restructurings compared to post-default restructurings over a two-year horizon.

- Box 2 — Global counts and patterns (select figures):
  - More than 600 individual sovereign debt restructuring cases in 95 countries during the past 60 years.
  - Of these, 186 were debt restructurings with private creditors (foreign banks and bondholders).
  - More than 450 involved restructurings with the Paris Club (government-to-government debt).
  - Of the 186 debt exchanges with foreign private creditors:
    - 18 were sovereign bond restructurings, while 168 affected bank loans.
    - 57 involved a cut in face value (debt reduction), while 129 implied only a lengthening of maturities (debt rescheduling).
    - 109 cases occurred post-default, while 77 were preemptive.
    - Only 26 involved cash buybacks (most buybacks involved discounts of 80 percent or more).

### V. Selected case and Table 1 highlights (1998–2010; selected exact figures from the table)
- Examples (selected rows from Table 1 preserving exact numbers):
  - Pakistan (Bank Loans): Post-Default; Default Date Aug-98; Announcement of Restructuring Aug-98; Start of Negotiations Mar-99; Final Exchange Offer May-99; Date of Exchange Jul-99; Total Duration (Months) 11; Debt Exchanged in m US $ 777; Cut in Face Value 0.0%; Haircut Estimate (Cruces/Trebesch) 11.6%; Discount Rate (Cruces/Trebesch) 0.132.
  - Argentina (Ext. Bonds): Post-Default; Default Date Jan-02; Announcement of Restruct. Oct-01; Start of Negotiations Mar-03; Final Exchange Offer Jan-05; Date of Exchange Apr-05; Total Duration (Months) 42; Debt Exchanged in m US $ 60,572; Cut in Face Value 29.4%; Haircut Estimate (Cruces/Trebesch) 76.8%; Discount Rate (Cruces/Trebesch) 0.104; Outstanding Instruments Exchanged 66 US$ and AR$ denominated Bonds; New Instruments 5 US$ and AR$ denominated Bonds.
  - Iraq (Bank/Comm. Loans): Post-Default since 2003; Announcement in 2004; Start of Negotiations Jul-05; Final Exchange Offer Jul-05; Date of Exchange Jan-06; Total Duration (Months) 20 (since announcement); Debt Exchanged in m US $ 17,710; Cut in Face Value 81.5%; Haircut Estimate (Cruces/Trebesch) 89.4%; Discount Rate (Cruces/Trebesch) 0.123; Outstanding Instruments Exchanged Loans, Supplier Credit, Arrears; New Instruments Mostly Cash, 1 US$ Bond, 1 Loan.
  - Ecuador (Ext. Bonds) (Post-Default): Announcement Aug-99; Start of Negotiations Jul-98; Final Exchange Offer Sep-99; Date of Exchange Jul-00; Total Duration (Months) 25; Debt Exchanged in m US $ 6,700; Cut in Face Value 33.9%; Haircut Estimate (Cruces/Trebesch) 38.3%; Discount Rate (Cruces/Trebesch) 0.173; Outstanding Instruments Exchanged 4 Brady Bonds, 2 Eurobonds; New Instruments 2 Eurobonds.
  - Russia (Bank Loans): Post-Default; Default Date Dec-98; Announcement Sep-98; Start of Negotiations May-99; Final Exchange Offer Feb-00; Date of Exchange Aug-00; Total Duration (Months) 23; Debt Exchanged in m US $ 31,943; Cut in Face Value 36.4%; Haircut Estimate (Cruces/Trebesch) 50.8%; Discount Rate (Cruces/Trebesch) 0.125; Outstanding Instruments Exchanged PRINs, IANs, debt arrears; New Instruments 1 Eurobond.

### VI. Observations on negotiation length, participation, litigation and financial stability linkages
- Duration: Many restructurings completed in relatively short periods (seven of 18 within one year), but a minority required extended negotiations (three > two years).
- Participation and cuts:
  - NPV relief and face-value cuts vary widely across cases (NPV reductions 5 percent to nearly 90 percent; face-value cuts 0–82 percent).
- Litigation and holdout risks:
  - Litigation, holdouts, financial sector linkages, and political environment identified as common obstacles that can slow down restructurings (details and figures on litigation are presented elsewhere in the paper’s figures and boxes).
- Financial stability considerations:
  - Restructuring design may be influenced by potential contingent liabilities, bank exposures, and need to maintain domestic financial intermediation; domestically held debt restructurings can present additional fiscal and banking system challenges.

*Prepared by Udaibir Das, Michael Papaioannou, David Grigorian, and Samar Maziad (MCMDM) — content drawn from “1. Characteristics of Main Sovereign Debt Restructurings with Foreign Banks and Bondholders” (1998–2010) as provided.*

### 14. A combination of high participation rates and speedy completion of most recent

### 14. A combination of high participation rates and speedy completion of most recent

### Main finding on participation and offer reasonableness
- High participation rates and speedy completion of most recent debt restructuring episodes likely suggest that the underlying offers were seen by participating creditors as reasonable, reflecting governments’ capacity to pay and offering adequate burden sharing.
- Theoretical support: Bi, Chamon, and Zettelmeyer (2011) predict that haircuts not in line with the government’s capacity to pay give small creditors incentives to coordinate and block an exchange offer, increasing the likelihood that an exchange offer will fail.

### Domestic versus external debt restructurings
- Negotiation process and restructuring mechanics are essentially the same across domestic and external restructurings (see Erce and Diaz-Cassou, 2010; Sturzenegger and Zettelmeyer, 2006), but several notable differences exist:
  - Domestic debt is adjudicated domestically, often leaving litigation in domestic courts as the only recourse for investors.
  - Investors in domestic instruments are normally mostly residents (domestic banks, insurance companies, and pension funds); restructuring domestic debt directly affects balance sheets of domestic financial institutions and can affect overall financial stability.
  - Exchange rate considerations and currency mismatches play a lesser role in domestic debt than in external debt restructurings.
  - Financial sector stability considerations often play an important role in domestic sovereign debt restructurings.
- Speed of implementation:
  - Argentina’s domestic debt was restructured in November 2001, while the external bond exchange took four more years.
  - Russia’s domestic GKO bonds were restructured within six months (between August 1998 and March 1999); restructuring of external bank loans took until 2000 to complete.
  - Ukraine’s domestic debt exchange was implemented in less than two months, with separate offers for resident and nonresident holders.
  - Jamaica’s restructuring of a sizable stock of domestically issued debt took about two months.
- Differential treatment examples:
  - Belize (2007): government restructured only the external bonds.
  - Ecuador (1998–2000): restructured short- and long-term bonds held by nonresidents, but not medium- and long-term domestic debt.
  - Ecuador (2008–2009): default and debt buyback affected two outstanding international bonds, but no domestic debt.
  - Jamaica (2010): externally issued Eurobonds were excluded from the restructuring (primarily for market access considerations).
- Note on creditor residence and instrument type:
  - Nonresidents sometimes hold substantial domestic debt (e.g., Russia, 1998; Ukraine, 1998).
  - Residents sometimes hold considerable shares of externally issued bonds (e.g., Pakistan, 1999; Uruguay, 2003).
  - Thus, the type of debt instrument issued (domestic vs external) is not necessarily a good predictor of the type of creditors affected (residents vs nonresidents).
- Domestic debt can also be denominated in foreign currency.

### Bank versus bond restructurings
- Key difference: creditor structure — bond creditors are typically more dispersed than bank creditors.
  - Recent bond restructurings (e.g., Argentina (2005) and Ukraine (2000)) involved thousands of individual creditors.
  - Dispersed creditor structures complicate identification and communication with bondholders, especially retail bondholders.
- Creditor holdouts and litigation:
  - Widely seen as the main potential obstacle to timely and efficient bond debt restructurings; free-riding and coordination failures are considered more problematic for bond financing than bank financing in emerging markets (e.g., Krueger, 2002).
  - Litigation occurrences: only 112 individual litigation occurrences in the past thirty years (see Enderlein, Schumacher and Trebesch, 2012).
  - More than half of all cases were initiated after 2000, despite a decline in sovereign defaults and restructurings in the past decade; one reason is deliberate expansion of circumstances under which lawsuits against sovereigns can be brought in some jurisdictions.
  - Change in legal doctrine and related case law developments contributed to emergence of “vulture” creditors and a small number of high profile litigation successes in the mid- and end–1990s.
- Empirical findings on speed and participation:
  - Bond restructurings have on average been quicker to implement than bank debt exchanges.
  - Participation rates have often exceeded 90 percent, even with dispersed bondholders (see Table 1).
  - Trebesch (2008) finds no robust evidence that creditor characteristics play a dominant role in the duration of debt restructurings.
  - Large holdout groups and inter-creditor disputes have remained the exception.
  - Number of successful litigations by creditors remains very small; holdout strategies and litigation are costly and require specialized knowledge.
  - Bi, Chamon, and Zettelmeyer (2011) model why coordination failures and litigation have been rare in the recent decade: full participation is the norm as long as neither the haircut nor the probability of successful holding out is too high; holdout strategies and litigation are costly and require specialized knowledge.

### Creditor litigation and “vulture” funds (Box 3 highlights)
- Stylized litigation strategy: a “vulture” creditor buys sovereign debt claims at deep discount then sues for full debt repayment (100 percent of nominal value plus accumulated interest); strategy is risky and can take many years to pay off, but has attracted specialized investor funds.
- Prominent examples of successful litigation cases include Elliott vs. Peru in 1998 and the Dart family lawsuit against Brazil in the mid-1990s (see Fisch and Gentile, 2004).
- Litigation trends and limitations:
  - Figure 1 (1980–2009) shows the rise in annual new cases filed in U.S. and U.K. courts; spike in 1990 due to Peru’s Brady deal; increase after 2001 relates to numerous lawsuits following Argentina’s default.
  - Despite increase in lawsuits, the number of “successful” litigations (settlements or successful attachments of sovereign assets) has been quite small even in recent years.
  - Critical limits on enforcement remedies: even with a judgment, creditors must find assets to execute judgments; most sovereign assets outside national territory remain subject to sovereign immunity protections.
  - Argentina’s “vulture” creditors’ long-running quest for assets demonstrates practical limits on litigating against sovereigns even with enforceable judgments.
  - Geography of adjudication: most lawsuits involving international debt contracts are filed in New York or London courts; lawsuits increasingly initiated in other creditor jurisdictions (Germany, Italy, Switzerland) and in debtor countries’ domestic courts (e.g., Russia, 1998).

### Notable troubled restructurings with holdouts and litigation
- Two recent restructurings faced considerable problems with holdouts and litigation:
  - Argentina global bond exchange (2005).
  - Dominica (2004).
- Case outcomes:
  - Dominica gradually convinced individual creditors to accept its original exchange offer between 2004 and 2007.
  - Argentina launched a new public exchange offer in April 2010 achieving a 66 percent participation rate, bringing total participation to 92 percent (Hornbeck, 2010).
  - Many of the remaining 8 percent holdouts, including distressed debt funds, continue litigation efforts.

### Participation in domestic vs external exchanges where both were restructured
- Russia: domestic GKO bond offer accepted by 95 percent (residents) and 85 percent (nonresidents); exchange of external PRINs and IANs reached 99 percent participation.
- Ukraine: domestic debt exchange achieved less than 85 percent participation, compared to 97 percent for international bonds.
- Argentina (2001–2002): only 65 percent participation for domestic bond exchanges.
- Uruguay: 99 percent participation in domestic bond exchange—attributed at least partially to moral suasion and regulatory incentives.

### Legal remedies, governing law, and clauses
- Governing law:
  - A bond’s governing law predefines contractual provisions for restructuring and jurisdiction for potential litigations.
  - A large majority of outstanding emerging market bonds issued in international markets are under New York law; English law is the second most common.
  - For EU countries, since 2003 public bonds have been predominantly issued under domestic laws.
  - Governing law affects a sovereign’s scope to alter substantive terms of sovereign debt contracts by changing relevant laws.
- Collective Action Clauses (CACs):
  - Inclusion of CACs has been the norm under English law; their use widened in recent years.
  - CACs can facilitate creditor-debtor negotiations by reducing the unanimity hurdle via majority restructuring clauses and by limiting potential litigation from holdout creditors.
  - Mexico first included CACs in New York market sovereign bond issue in February 2003; other early adopters in 2003 included Uruguay, Brazil (April); Korea, South Africa (May); Belize (June); Italy (July); Turkey (September).
  - Since then, inclusion of CACs in New York law bonds has become the norm.
  - EU countries agreed to update bond documentation on internationally issued bonds to include CACs (ECFIN, 2004).
  - General CAC categories: (i) “majority restructuring” provisions allowing a qualified majority to change financial terms and bind other holders; (ii) “majority enforcement” provisions which can limit a minority’s ability to enforce rights following default.
  - On some occasions (e.g., Uruguay and Jamaica), explicit announcement of minimum participation thresholds were used to solve coordination problems.
- Experience with CACs:
  - Triggering CACs was not common and results were mixed.
  - Ukraine (2000): successful application—authorities used CACs in three Eurobonds governed under Luxembourg law, helping implementation and eliminating potential holdout problems.
  - Moldova (2002) and Uruguay (2003): CACs under English law contributed to quick restructuring.
  - CACs were embedded in instruments exchanged by Dominica (2004) and Argentina (2005), but did not prevent serious holdout problems in those countries.
- Exit consents:
  - First used in Ecuador’s 2000 exchange of a sovereign bond under New York law.
  - Ecuador’s exchange required participating bondholders to agree to amendments of nonpayment terms.
  - Uruguay (2003) exit consents aimed to avoid litigation and limited the possibility of attaching future payments on new bonds via court ruling (waiver of sovereign immunity).
  - Ecuador’s exit consents covered a broader range of terms and were perceived as “take-it or-leave-it”; Uruguay participants could opt out of exit consents.
  - Uruguay: more than 90 percent of participants approved use of exit consents; one small Brady bond did not reach minimum approval rate of 50 percent necessary to activate exit consents.
  - As of January 2012, Argentina had not delisted old securities despite exchange prospectus noting the country might delist them.
  - Exit consents under New York law have generally withstood legal challenges in U.S. courts; U.S. courts have refused to invalidate exit consents that removed important bondholder rights in some corporate restructurings.
- Use of other clauses:
  - Use of aggregation, acceleration, cross-default, and cross-acceleration clauses in recent restructuring episodes has been limited.
- Amendments of nonpayment terms:
  - Nonpayment terms were amended in Dominica (2004), the Dominican Republic (2005), Argentina (2005), and Belize (2007).

*Source: IMF chapter text (excerpts provided in the content unit).*

### 30. The introduction of CDSs is a relatively new development and their impact on debt

### 30. The introduction of CDSs is a relatively new development and their impact on debt restructuring remains uncertain

### CDSs, credit events, and market size
- ISDA announcement of a credit event typically depends on characteristics of the debt exchange (for example, whether terms are binding for all creditors), not on whether the restructuring is pre- or post-default.
- There is a view that CDS holders who also own the underlying bond may have an incentive not to participate in a pre-default debt exchange and to prefer forcing a default that constitutes a credit event.
- The sovereign CDS market is relatively small compared with underlying outstanding debt, so such incentive-driven risk has been fairly limited to date.
- Empirical example:
  - Ecuador: Payments on Ecuador's CDS were triggered on December 15, 2008, when President Rafael Correa refused to meet an interest payment due on the country's 2012 global bond.
  - ISDA launched its first sovereign CDS auction; the recovery rate in the auction was set at 31.75 percent.

### Macroeconomic implications of debt restructuring
- Debt ratios and short-term external vulnerability:
  - Total public debt to GDP: median fell from over 50 percent to about 35 percent around restructuring.
  - Total external debt to GDP: median fell from close to 80 percent to below 50 percent.
  - External short-term debt to reserves: median fell from more than 110 percent to just over 55 percent in a single year.
- Output and inflation:
  - Median real growth: around 1.5 percent three years before final agreements, consistently above 4 percent during the three years following the exchange.
  - Median CPI inflation: around 20 percent three years before restructuring, decreasing to just 7.5 percent three years after restructuring.
- Fiscal balances:
  - Median budget balance improved substantially prior to restructuring in some cases, reflecting strong policy effort.
- Reputational and private-sector spillovers:
  - Private sector access to external credit: often drops by up to 40 percent in the year after restructuring.
  - FDI flows: may drop by up to 2 percent of GDP per year.
  - These estimates are subject to caution because the counterfactual is difficult to establish.
- Credit ratings:
  - Ratings decline by more than four notches in the three years prior to a sovereign default event.
  - After restructurings, ratings started to recover but gained only an average of 1.7 notches in the three subsequent years.
  - After one year most sovereign bonds retained a C-rating.
  - All sovereigns in the sample had speculative-range ratings one year prior to default; the best rating just prior to default was B3.
  - Uruguay was an outlier: investment grade status (Baa3) up to March 2002 and restructured its debt 14 months later.
- Market access after restructuring:
  - Most defaulters regain access to new credit within one or two years after a crisis.
  - Period of exclusion from capital markets has shortened compared to the 1980s.
  - Examples:
    - Argentina: has not been able to access the global markets since its 2001 default (at the time of writing).
    - Ecuador: took five years (in 2005) after restructuring to regain access.
- Post-restructuring costs and spreads:
  - Defaults affect risk spreads mainly in the first and second year after restructuring.
  - Greater haircuts are associated with much larger post-restructuring bond spreads, with the effect decreasing over time but still significant in years six and seven after the restructuring.
  - Haircut size is highly correlated with the duration of capital market exclusion.

### Financial stability implications of debt restructuring
- Direct and indirect channels of bank impact:
  - Asset-side losses from restructured assets losing value.
  - Liability-side pressures from deposit withdrawals and interruption of interbank credit lines.
  - Interest rate hikes triggered by restructuring can increase banks' funding costs and impair income.
  - Combined effects may threaten financial stability and raise pressures for bank recapitalization and official sector bail-outs.
- Historical examples of adverse effects on domestic financial sectors:
  - Russia: default contributed to effective collapse of the domestic banking system; large Moscow-based commercial banks significantly exposed to domestic treasury bills and currency mismatches; some banks became insolvent and defaulted on external obligations.
  - Ecuador: sovereign default followed a systemic banking crisis (liquidation of five financial institutions); restructuring further dented banks’ capital.
  - Jamaica (2010): concerns about financial sector stability prompted the government to adopt a preventive financial sector contingency plan.
- Cross-border contagion:
  - Banks and financial institutions exposed to a restructuring country can transmit shocks across borders via loss of value in government securities or via exposure to that country's banking sector.
  - Examples of foreign exposure:
    - German banks and funds: heavily exposed to the Russian default of 1998.
    - U.S. financial institutions and European retail investors: most affected by the Argentine default and debt exchange of 2001 to 2005.

### Policy measures and contingency mechanisms (illustrative cases)
- Jamaica: Financial Sector Support Fund (FSSF)
  - Size and purpose:
    - US$950 million in multilateral funds established as a contingent measure to address possible adverse impacts of the debt exchange on the financial sector.
    - Available to individual institutions encountering specified problems, primarily liquidity, directly related to the debt exchange.
  - Participation and incentives:
    - Access restricted to financial institutions that participated at a rate of at least 90 percent in the debt exchange; FSSF acted as an incentive to participate.
  - Terms and safeguards:
    - Primary use: provide liquidity support for external funding calls or deposit/asset pressures attributable to the debt exchange.
    - Interest rate set to avoid fiscal costs.
    - Any borrowing was to be repaid within 6 months or else a punitive rate would apply.
    - Liquidity support above a threshold (percent of capital) would trigger increased regulatory intervention; emergency liquidity triggers would lead to supervisory actions and possible intervention if maximum levels were breached.
  - Outcome:
    - No requests for assistance from the FSSF were filed during and after the restructuring.
- Other policy notes:
  - Depending on circumstances, governments may ultimately bear the cost of bank recapitalizations to maintain banking system stability and secure credit flow.

### Conclusions and general observations from EM experience
- Creditor coordination and holdouts have not generally been a major problem, despite lengthy negotiations and delays in many cases.
- Bond restructurings have on average been quicker to implement than bank debt exchanges; participation rates have often exceeded 90 percent, even with dispersed bondholders.
- Creditor characteristics did not appear to play a major role in restructuring duration; domestic restructurings were implemented in less time than external restructurings in some evidence.
- Bond contract features (e.g., CACs and other legal clauses) facilitated crisis resolution but did not guarantee smooth restructurings on their own.
- Macroeconomic indicators tended to improve in the immediate years after debt restructurings.
- Market access could be restored relatively quickly after restructuring, but post-restructuring access could come at a cost through higher credit risk spreads associated with larger haircuts.
- Debt restructurings in some cases were associated with spillovers into the financial sector; in at least one case (Jamaica) an effective backstopping mechanism was put in place to minimize the impact.

### Appendix I — Selected contract provisions (definitions and roles)
- Exit consent:
  - Legal provision allowing a simple majority of bondholders to modify nonpayment terms of old bonds in an exchange to render old bonds unattractive or illiquid.
  - Common exit consent measures: de-listing outstanding bonds, removal of cross-default clauses, removal of acceleration clauses.
  - Exit consents can reduce holdout leverage by leaving nonparticipating bondholders with less liquid, less attractive bonds.
- Acceleration clauses:
  - Entitle creditors to “accelerate” unmatured principal following a default event; missed payments make all principal and accrued interest immediately due and payable.
  - Typically requires a minority vote of at least 25 percent of outstanding principal to accelerate.
  - Acceleration can sometimes be revoked (“de-accelerated”) by a majority of bondholders if the default is “cured.”
  - Example: Ecuador 2000 debt exchange was conditional on bondholders revoking acceleration decisions on old bonds.

*Italic source: IMF chapter titled "30. The introduction of CDSs is a relatively new development and their impact on debt restructuring remains uncertain" (content unit provided).*

### 46. A cross-default takes place if a default event on one debt contract can trigger a default

### 46. A cross-default takes place if a default event on one debt contract can trigger a default on another agreement

### Cross-default: definition and effects
- A cross-default takes place if a default event on one debt contract can trigger a default on another agreement.
- This implies that a missed payment (including a coupon payment) can trigger a default vis-à-vis the remainder of government’s (bank and bond) obligations.
- Cross-default clauses can strengthen the principle of inter-creditor equity and act as a deterrent to selective default (i.e., the decision to pick and choose which bondholders or banks to repay).
- During the 1980s, cross-default clauses in sovereign loan contracts protected banks from selectively defaulting on syndicated loans or parts thereof.
- Eurobonds and Brady bonds issued since the 1990s typically contain cross-default clauses.
- Note, however, that many bonds provide for a minimum amount (e.g., 25 percent) to trigger cross-default provisions.

### Cross-acceleration and exit consents
- Cross-acceleration implies that the acceleration on one debt contract may accelerate other (third party) debt contracts as well.
- Exit consents are often used to remove this type of clause from the old bond contracts to protect new bondholders from legal remedies by nonparticipating holdouts.
- Once the cross-default and cross-acceleration clauses are removed, any nonpayments or disputes related to the old bonds will no longer trigger default and acceleration on the new bonds.
- Cross-acceleration clauses too often require a minimum vote share to be triggered.

### Aggregation clauses: purpose and mechanics
- CACs, exit consents, and other innovations in individual debt contracts are often insufficient to deal with broader collective action problems because they can only bind bondholders within the same issue without affecting bondholders across other bond issuances or other types of debt (e.g., bank debt and trade credit).
- Aggregation clauses are provisions that allow the aggregation of creditor claims across all bonds and other debt instruments for voting purposes.
- Depending on the exact language of the clause, a supermajority of bondholders could then be enabled to amend the payment terms of a multitude of individual bond series at the same time.

### Use in practice and voting thresholds
- The use of aggregation clauses in sovereign bonds remains limited.
- Uruguay introduced them during the 2003 exchange and was followed by Argentina (2005) and several smaller issuers, including Belize and the Dominican Republic.
- The aggregated CACs in the bonds of Argentina and Uruguay both contain a dual voting threshold structure with two-tiered voting.
- Aggregation clauses have not been called yet in any sovereign debt workout in recent years.
- Specifically, a modification of terms require an approval by a total of 85 percent of bonds of all affected series (aggregate of at least two bonds) as well as by 66 percent of outstanding bonds of each affected series (issue-by-issue).

*Source: _060512 - 46. A cross-default takes place if a default event on one debt contract can trigger a default*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2012/_060512.pdf_